Topic 1: Introducing the financial services industry

Question 1

In order to be acceptable as a medium of exchange, money must have certain properties.

Answer 1

„sufficient in quantity;
„ generally acceptable to all parties in all transactions;
„ divisible into small units, so that transactions of all sizes can be precisely
carried out;
„ portable

Question 2

Inflation

Answer 2

A sustained increase in the general level of prices of goods and services

Question 3

Financial institutions offer products and services that provide benefits
including:

Answer 3

convenience, a means of achieving otherwise difficult objectives, protection from risk

Question 4

Money is:

Answer 4

a medium of exchange, a unit of account, a store of value.

Question 5

FINANCIAL INTERMEDIARY

Answer 5

An entity that acts as the middleperson between two parties in a financial transaction. Banks and building societies are the best-known examples.

Question 6

What is an intermediary’s profit margin?

Answer 6

An intermediary’s profit margin is the difference between the two interest rates.

Question 7

DISINTERMEDIATION

Answer 7

It involves lenders and borrowers interacting directly rather than
through an intermediary

Question 8

Crowdfunding

Answer 8

a company that is looking to raise funds to invest in the business establishes a website to promote itself anf find investors who are willing to lend money to it.

Question 9

The four elements of intermediation

Answer 9

Geographic location, Aggregation, Maturity transformation, Risk transformation.

Question 10

Insurance

Answer 10

a means of shifting the burden of risk by pooling to minimise financial loss

Question 11

‘Product sales’ intermediaries

Answer 11

financial advisers, insurance brokers and mortgage advisers.

Question 12

RETAIL BANKS

Answer 12

Banks that provide payment services and savings and loans to personal
customers or smaller businesses.

Question 13

WHOLESALE BANKS

Answer 13

Banks that provide funding for other financial institutions or very large
corporate clients

Question 14

LIFE ASSURANCE

Answer 14

Insurance that provides payment, generally as a lump sum but possibly
as an income, on the death of the person covered by the policy. It is
sometimes referred to as life insurance or life cover.

Question 15

GENERAL INSURANCE

Answer 15

Insurance designed to protect policyholders from the financial
consequences of adverse life events. Examples include household
insurance, motor insurance, travel insurance and commercial property
insurance

Question 16

The Bank of England

Answer 16

A central bank is an organisation that acts as a banker to the government,
supervises the economy and regulates the supply of money
-issuer of banknotes
-banker to the govt
-banker of the banks
-adviser to the govt
-foreign exchange market
-lender of last resort
-maintaining economic stability

Question 17

Monetary Policy Committee

Answer 17

sets the interest rates. meets at least 8 times a year.

Question 18

HM Treasury’s Debt Management Office

Answer 18

Deals with managing new issues of gilt-edged securities. (These securities are called gilt-edged because they used to be issued in the form of paper certificates with gilt edging)

Question 19

Financial Services Authority

Answer 19

helds the responsibility for the supervision and regulation of the UK banking sector.

Question 20

what did The Financial Services Act 2012, effective from 1 April
2013 do?

Answer 20

divided responsibility for financial stability between the Treasury, the Bank of England and two new regulators: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

Question 21

Proprietary organisations

Answer 21

The great majority of the large financial institutions are proprietary
organisations, which means that they are limited companies. They are owned by their shareholders, who have the right to share in the distribution of the company’s profits in the form of dividends. They can also contribute to decisions about how the company is run by voting at shareholders’ meetings.

Question 22

Mutual Organisation

Answer 22

a mutual organisation is one that is not constituted as a company
and does not, therefore, have shareholders. The most common types of mutual organisation are building societies, friendly societies and credit unions; some life assurance companies are mutual, too

Question 23

Demutualisation

Answer 23

to convert to a bank (status changed to that of a public limited company)

Question 24

Carpetbagging

Answer 24

This refers to the practice of opening an account at a building society that is expected to soon convert, purely to obtain the subsequent allocation of
shares.

Question 25

POTENTIAL RANGE OF SERVICES OFFERED BY FINANCIAL
SERVICES GROUP

Answer 25

Image.

Question 26

What is a credit union?

Answer 26

A credit union is a mutual organisation. Credit unions are run for the benefit
of their members. In order to join a credit union, the member must meet the membership requirements, pay any required entrance fee and buy at least one £1 share in the union. Credit unions can choose whether to offer ordinary shares (which are paid up and bring all the benefits of credit union membership), or deferred shares, which are only payable in special circumstances. All members of the credit union are equal, regardless of the size of their shareholding.

Question 27

Who controls the credit union?

Answer 27

owned by the members and controlled through a voluntary board of directors, all of whom are members.
Board members are elected at the AGM.
Director controls the organisation.

Question 28

Interbank Market

Answer 28

A very large market which recycles surplus cash held by banks, either
directly between banks or more usually through the services of
specialist money brokers.

Question 29

ring fencing

Answer 29

regulators sought to ensure that banks involved in both retail and wholesale banking did not expose their retail customers’ deposits to risk as a result of their wholesale operations.

Question 30

Building societies can raise funds on the wholesale market but are restricted to how much of their liabilities?

Answer 30

50%

Question 31

LIBOR

Answer 31

The rate of interest charged in the interbank market. used to act as a reference rate for the majority of corporate lending, for which the rate is quoted as Libor plus a specified margin.

Question 32

SONIA

Answer 32

Based on actual transaction and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions.

Question 33

How can a bank involved in wholesale banking raise money quickly
in order to finance business activities?

Answer 33

From the interbank market

Question 34

Credit unions cannot pay interest on savings. True or false?

Answer 34

False. Credit unions can pay interest on savings as long as they have the
necessary systems and controls in place and have at least £50,000 or 5 per
cent of total assets (whichever is greater) in reserve.

Question 35

Who is responsible for administering Sonia?

Answer 35

The Bank of England is the administrator for Sonia. The FCA used to
regulate the Wholesale Markets Brokers’ Association as the calculation and
publication agent. In April 2018, the Bank of England assumed calculation
and publication duties.

Question 36

Which organisation is responsible for managing new issues of UK gilts?

Answer 36

The Debt Management Office

Question 37

What is the maximum borrowing a building society can raise on the wholesale market?

Answer 37

50% of their liabilities.

Question 38

The benchmark for financial businesses and institutions to calculate the interest paid on swap transactions and sterling floating rate notes is the:

Answer 38

sterling overnight index average

Question 39

Where lenders and borrowers interact directly, it is known as:

Answer 39

disintermediation.

Question 40

Finance houses raise most of their funds through:

Answer 40

wholesale markets.

Question 41

Which of the following is not one of the four elements of intermediation?

Answer 41

Equalisation.

Question 42

The Workers Credit Union has reserves of £60,000, which equals 6% of its assets. This means it:

Answer 42

can pay dividends or interest to savers.

Question 43

Which of the following is not a function of the Bank of England?

Answer 43

Prudential regulation.

Question 44

In order to be acceptable as a medium of exchange, money must have certain properties. Which of the following is not one of the properties?

Answer 44

Available in high value denominations.

Question 45

Which one of the following is not an example of a mutual organisation?

Answer 45

Eastern Bank